I was getting annoyed today by lousy spreads on illiquid contracts. Fantasized about manipulating prices, but... 1. It is a violation of U.S. option exchange rules for a customer, acting alone or in concert with others, to send an order to an option exchange in order unlawfully to manipulate the execution price of a separate order on that exchange or on another exchange. (From IB's Forms and Disclosures) This is common knowledge, but I am in the mood to complain. I'm sure most of you find the rule to be complete bullshit (along with the five or so others that I did not include here). Hopefully, IB's venture with BOX will put an end to this: Nowadays, if one puts in a relatively small order (10 contracts or less) your order is automatically pegged by MM's on options exchanges who will display more size at the same price, effectively sending the small order to the back of the line, and voiding any chance to buy the bid or sell the offer. This is 'legitimized' by the above rule, legally obligating a retail trader/investor type to cough up the spread. BOX, however, is intended to give everyone equal footing- http://www.elitetrader.com/vb/showthread.php?s=&threadid=4100l My question is this: how is BOX going to actually put an end to this practice, considering that there are at least 5 other exchanges that currently have all market share...? Also, will BOX use price increments of 0.05, or will there be a move to go to 0.01? (Using the smaller decimal increment might give BOX the edge it needs). PLUS, (fitting in with their overall theme of screwing you however they can) options MM's give hefty payment for order flow - I hardly see BOX competing in this respect (at least initially), not to mention the difficulty for the generic retail brokers (i.e. datek, fidelity, etrade) to gear up in order to route to BOX. Any thoughts?
So if you enter a better offer in a one lot and other exchanges match your offer and then you turn round and buy a 10 lot at the better offer you have created, you are breaking the law? I have noticed that other exchanges often match my offer whe I split the bid on the ise. I was presuming that I will be at the front of the queue on the ise but I guess if other exchanges pay for order flow then I may missing out. If the Box have 0.01 bid/ask spreads and let anybody act as a market maker then they will have significant market share from day one.
The 0.05 vs. 0.01 thing was just something that reminds me of the old days of fractions, and how the bigwigs didn't want decimals. But a few decades after money switched to the decimal system, US stock markets switched too and us decimal types finally got our way! Frankly, I don't know the reason why 0.05 is the smallest increment - maybe easier to work with on the floor - but it just seems to me that cutting that into 0.01 increments would create a more competitive market, and thus narrow spreads significantly. Maybe even give BOX an edge right out of the box. Ha. I mean, can you imagine being able to trade QQQ options with 0.01 increments??? This would provide another alternative (besides futures) to the PDT rule, as the slippage and liquidity factors would eat away fewer profits. Not to mention increased arb opportunities.
That rule has nothing to do with what you are suggesting. That is "small lot baiting"; i.e. you offer a one lot @ X, on a strike with a large spread, they post you collapsing the spread to one tick, you hit that for a ten lot, they fill, reverse on the exit. Like taking candy from a baby, very illegal, don't try it, you will get caught.
Cutting the spread to $.01, would hurt not help, most professional traders, and not just MM, we are off floor traders. The switch to decimals cost us about 20% of our revenue last year. The increased competition might tighten the spreads from their average of 4 or 5 ticks, which would help. The arb opportunities in the option market would cease to exist @ a $.01 spread.
This may be a dumb idea - what would happen if all of us put out buy orders (or sell short orders) on options contracts inside the spread for just one contract? Say a contract is quoted at 4.20 x 4.80, with 50 contracts on either side. If I put in an order to sell just ONE contract limit at 4.30, a computer (or MM) will move the offer down from 4.80 to 4.30, with more contracts (at least 10) in order to step in front of me, so I can't make the market and sell at 4.30. If someone else then tries to buy 10 contracts, the MM who stepped in front of me is obligated to honor his quote of 4.30 (although he may get cute and back away - but that's another issue). Theoretically it is not collusion or spoofing because I just want to sell that contract at 4.30, nor have I pre-arranged with anyone else to buy those contracts now offered at 4.30. The risk is that the market moves so that the quote is say, 4.30 x 4.90, in which case my sell order matches the bid and I sell at 4.30.